Actuarial Equivalence Key in Benefits Calculation Case

The 7th U.S. Circuit Court of Appeals has found that a defined benefit plan administrator used a permissible, and correct, interpretation of the plan document to determine a retiree’s benefits.

Roger G. Cocker contested the benefits amount expressed to him by the Terminal Railroad Association of St. Louis Pension Plan for Nonschedule Employees, which included an offset of pension benefits he was receiving from another plan. Cocker had taken early retirement from Union Pacific in 2006. Had he waited until his normal retirement age to retire, he would have received $2,311.73 in monthly benefits, but since he chose to begin receiving his benefits in 2009, he received $1,022.94 per month.

The appellate court noted that the two dollar figures are actuarially identical, in the sense that the present value of the two streams of money is the same because the smaller monthly benefit is received for 111 months longer than the larger one.

The Terminal plan document provides that the benefit payable under the plan shall be offset by the amount of retirement income payable under any other retirement benefit  plan to the extent that the benefit payable under the other plan is based on benefit service taken into account in determining benefits under the Terminal plan. The plan also provides that if “the benefit under such another plan is paid in a form other than the form of payment under this Plan, including without limitation a single lump sum cash payment made prior to retirement, the amount of such offset shall be the dollar amount per month of the benefit that would have been payable under such other plan in the form of a Single Life Annuity commencing on the Participant’s Normal Retirement Date.”

Cocker argued that the benefit of the Terminal plan should have been offset by the actual payments he was receiving, but the Terminal plan began paying him benefits offset by the larger amount of $2,311.73.

The court noted that the Terminal plan administrator was right, with actuarial equivalence being key to its conclusion. The 7th Circuit concluded that the monthly offset required by Terminal’s plan is the amount payable under the prior employer’s plan. While $2,311.73 was the maximum amount payable to Cocker per month under the Union Pacific Plan, he lost nothing by choosing to receive only $1,022.94, because the expected value of a stream of monthly receipts of that amount was equal to the expected value of a stream of monthly receipts of $2,311.73 received for many fewer months.

The court concluded that deducting only $1,022.94 would have given Cocker a larger Terminal pension and made him better off than if he’d received his Union Pacific pension in larger monthly payments for a shorter period.

Cocker further argued that the Terminal plan administrator had a conflict of interest. But the court found that irrelevant, as it found not only that the plan administrator adopted a permissible interpretation of the plan document but also that the interpretation was correct.

The 7th Circuit reversed judgment of a district court with instructions to dismiss the suit with prejudice.

The appellate court’s opinion is here.